Generating binomial interest rate tree

CFA Level II Fixed Income
#1

Given the following info:

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How do we generate the following binomial interest rate tree? Please ignore the non-% figures

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For example, at Date 2, how do we obtain 2.9493% for the middle node?

Thanks so much in advance

#2

You generally use something like Solver in Excel, adjusting the rates until a par bond is priced correctly.

The process is iterative: first price a 1-period bond correctly, then a 2-period bond, then a 3-period bond, and so on.

You won’t have to do that on the exam; you’ll be given a calibrated tree.

#3

Thanks very much @S2000magician . I thought it was weird the CFA question bank didn’t give the interest rate tree

#4

My pleasure.